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Wednesday, October 08, 2003

A few weeks back I talked about the stalled divestment of HPCL. Things have gotten more confused since then.

Since then GOI had floated the the idea of splitting Indian Oil Corporation (IOC) into two or three different entities and selling off their retail arm. IOC is India's only Fortune 500 company. IOC obviously did not like the idea one bit. They have since offered to take HPCL off the government's hand in order to let them meet their divestment targets. This is probably a slightly better suggestion. Business Standard rightly noted in today's editorial:

"Even on the face of it, the government's decision to split Indian Oil Corporation (IOC) into two parts, and sell off around half its marketing outlets, if it is not possible for it to sell off Hindustan Petroleum (HPCL), is a classic case of the cure being worse than the ailment — the ailment in the current case being the Supreme Court's ruling that neither HPCL nor BPCL could be sold without prior permission of Parliament.

For, the retail outlets account for roughly 40-45 per cent of not just IOC's profits, but those of any refining-cum-marketing outfit like even HPCL and BPCL.

Cut off this vital arm, and it is not just the profits, but a significant part of IOC's viability that is under a shadow — from where, then, is it to sell the output that comes out of the eight refineries it owns?

It is in fact this very realization, that stand-alone refineries are not viable without an accompanying retail distribution network, that led the government to set up the Nitish Sengupta committee in 1999 which recommended that the four stand-alone refineries like Madras Refineries and Bongaigaon be merged with retail firms like IOC and BPCL. After the Sengupta recommendations, in fact, these refineries were merged.

It is, of course, true that the Supreme Court's ruling is debatable, especially since we've seen just what happens when a company with such large resources is left at the mercy of the country's politicians — the petrol pump scam is the most obvious manifestation of the evil that results.

But, like it or not, this is something the disinvestment ministry, and the entire country, will have to deal with in the correct manner, that is by approaching the Court once again, and if that fails, by approaching Parliament.

The decision to simply break up a well-run firm, sell off one part and then merge the other with either HPCL or BPCL (or both!) to create a completely unwieldy structure is a very sad reflection of the completely cavalier manner in which such vital economic decisions are taken.

Read the history of any merger/demerger in the corporate world, and it'll be obvious that it takes months, if not years, of careful planning and execution to carry off a successful exercise — it's not done with just the stroke of a pen, or with a few wise men meeting over a table."

Emerging Economies

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Claus and Edward's "Baker's Dozen"

Claus Vistesen and Edward Hugh are proud and happy to announce that they are now working as "featured analysts" with a new Boston-based start-up - Emerginvest.

Claus and Edward have used a new, updated, methodology in order to identify a group of 13 emerging economies which we consider are going to outperform both the rest of the emerging economy group and the OECD economies in terms of a number of key performance indicators over the 2008 - 2020 horizon.

Through our association with Emerginvest we hope to develop performance indicators which will confirm both the relevance and validity of the selection procedure adopted.

We would like to point out that we have absolutely no financial connection whatsoever with Emerginvest - although we do heartily endorse what they are trying to do.

In particular we see the move by the investment community towards emerging markets as one of the most effective and direct ways to address those issues of inter-country wealth and income imbalances which have plagued our planet for so long now - namely by getting the money from the rich who have it to the poor who need it.

Sending investment to emerging economies is also a way of addressing the underlying imbalances which exist between the relatively older populations of the developed economies who increasingly need to save, and the relatively younger emerging economies who can benefit from the investment of those savings in their countries. So in a way you can both ensure the future of your own pension and help attack poverty at one and the same time. This type of possibility is normally known in economics as "win-win".

The oldest known source and most probable origin for the expression "baker's dozen" dates to the 13th century in one of the earliest English statutes, instituted during the reign of Henry III (r. 1216-1272), called the Assize of Bread and Ale. Bakers who were found to have shortchanged customers could be liable to severe punishment. To guard against the punishment of losing a hand to an axe, a baker would give 13 for the price of 12, to be certain of not being known as a cheat. Specifically, the practice of baking 13 items for an intended dozen was to prevent "short measure", on the basis that one of the 13 could be lost, eaten, burnt or ruined in some way, leaving the baker with the original dozen.

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About Claus

Claus Vistesen is a 23 year old macroeconomist who is on the point of finishing his MSc in Applied Economics and Finance from the Copenhagen Business School. His primary research interests are international finance and international macroeconomics. Claus is especially interested in how the changing structure of global and national demographics impacts on local macroeconomic performance. Moreover - and as the wonk he ultimately is - he also takes a considerable interest issues and methodologies associated with econometrics, and this is an interest he intends to develop in his postgraduate research.

About Edward

Edward 'the bonobo' is a Catalan macroeconomist and economic demographer of British extraction, now based in Barcelona. By inclination he is a macroeconomist, but his deep-seated obsession with trying to understand the economic impact of contemporary demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".